The CORRECT Way To Do Due Diligence Before Buying an Apartment Building

0:00 talk about due diligence. Yeah, baby. Okay, we've we've we've already spent some time on this on the panel. Okay, so you've got to have a comprehensive due diligence checklist. Okay, the key is you want to look under every stone. Okay, you want to make every phone call that you need to make. You need to call or visit every county office. Okay, because you you don't want to dabble in this. This is this is the important work. Of course, you're going to do the empirical work and look at the numbers, but this is this is how you don't make a mistake. When you do that piece and you do this piece, okay, so let's here's what we're talking about. You're going to call the Chamber of Commerce if you haven't already. Now, chances are, you know, when you've picked a market, you should already have called the Chamber of Commerce in the economic development office to find out what's going on there. You know, ask

0:45 them what businesses are moving in, moving out. They'll tell you which ones are moving in for sure. You have to pry the ones that are moving out from them. But it's important for you to know that, right? Because jobs are the most important thing, you know. Are there any incentives for investing? Sometimes they'll have grants and and and tax rebate tax uh avoid uh programs where you can avoid taxes, things like that. You know, uh any new major employers coming in. They'll definitely know that. But again, you should already know this before you start putting offers in, right? This is why we have our warriors do like an area presentation. Uh and um so that you already have that done before you find a deal. Okay? You're already doing that homework. Okay? Um now, you know, you you're you analyze the neighborhood on spot crime and

1:31 things like that, but once you're under contract, you get your butt out there and you go check it out, right? You get in a car, you drive the neighborhood, ask yourself, would I want to live here? What are the jobs like around here? Would I enjoy living here? Is there anything to do? You know, is there public transportation nearby? These are the kinds of things you ask yourself, right? You know, where's the closest grocery store? Don't ignore that one. Sometimes it's 30 minutes away. Is that a problem? You better believe it. What are the schools like? Okay, if you're going to have two and threebedroom units, you're going to have families. What's the rating of those schools? Okay, are they any good? These are things that parents look at, right? What's there to do? Is there, you know, is there beach, hiking, recreation? How close is the shopping? Okay, these are all super important important questions.

2:17 Are there movie theaters nearby? You know, people want to have a life, right? So, these are things you look for. This common sense stuff, but you can't avoid it. You got to you got to you got to really look into this stuff. What about safety? Okay. Go there at 10:00 at night and see if there's a bunch of characters hanging around and cars going in and out like drug traffic. Okay? Would you feel safe collecting rents? Right? Again, go to spot crime. You want to do something interesting, put your home in there and and see how much crime's in your backyard. It's going to blow your mind. Okay? There's a lot of crime you're not aware of. But then then you compare that to an asset that you're looking at and you start to get a feel for where the hood is, right? Where you may not want to be. I'm going to suggest you don't go. Okay? Life's too freaking short. Now, another thing you can do that's

3:03 very effective is to call the non-emergency police number and ask them, you know, I'm looking at this property. Have you had problems there in the past? You know, what do you know about this property? You know, super important that you ask that. And they'll tell you what's going on there, you know, and and if there's been if there's been problems. And I, you know, I had to take over the management. Uh I've got a partner issue and I had to take over the management of a couple assets in Atlanta. The day after there was I was there, somebody got killed in that place. The other one I went to, there were two of them in Atlanta that I went to. The other one, somebody had gotten killed like a month before. Somebody got shot in the leg like a week before. I mean, it's just important stuff to know. It's why you call the non-emergency police number, right? Listen, people want clean, safe, and affordable. Okay?

3:50 And the, by the way, those weren't properties that I owned. I they asked me to step in and help with them. But uh but but people want clean, safe, and affordable. When you're driving through, c are there clear lines of sight? Are there places people can get jumped? What's the lighting like at night? Okay, that's when I buy an asset. Here's some of the first things I do. We put in a camera system every time, okay, where you can see the whole complex. We make sure the lighting is fantastic and we make sure the perimeter is secure. We put in gate, fencing, whatever it is, okay? particularly if it's, you know, if it's like a C area or a B area, you know, that's that even a B area, but a C asset, whatever. We we perimeter security if you can do it. Now, sometimes you can't do it, but if you can, you want to tighten that up. Those are the kinds of things we do immediately.

4:36 Okay? You want to talk to city planning and zoning, okay? Uh what sorts of violations have there been on the property? Okay. Are there violations that occur regularly? Okay. um you know like like sewer backups or other problems that that that they know about because there have been violation notices. Okay, this is another one. Have any permits been pulled? You know, have they corrected fire damage they haven't told you about? For example, here's another big one. Are there any zoning changes coming up that could positively or negatively impact the property? This stuff happens, guys. But this is the big one. Is there any infrastructure coming in? Let's say they're putting in a new sewer line. This happens, okay? And but guess who pays for that sewer line?

5:22 Okay, so if you buy it the day before that sewer line comes in, you're paying for it. So does it make sense to call and ask and find out if any of this stuff's happening? You better freaking believe it. Don't get lazy on this stuff, guys. You got to do it. Okay? Talk to contractors that have worked on the property, plumbers, electricians, HVAC, uh you know, maintenance people, the ones that have actually worked. And this is, by the way, this is when you're in due diligence. You're under contract. You can ask who's worked on the property. And you want to find out what they tell you about it. What are the typical problems they encounter when they're working on this thing, you know, what have they seen? What do they think about the infrastructure, the electrical infrastructure, the HBAC infrastructure, the plumbing? What are what are their thoughts on it? What would they repair if they owned it?

6:08 What would they replace if they owned it? Right? And and you know, is there deferred maintenance? It hasn't been done. Have they been cannibalizing HVAC units because they can't afford parts? I can't tell you. I I I saw this at a I I talk about Shreport. I tal I I dogged two cities, Memphis and Shreport. I bought a 403 unit asset in in Shreport. A uh a partner brought it to us. I think I may have mentioned it yesterday, but they they had cannibalized HVAC units for parts because they ran out of money. I mean, it's just it was a I'll talk about that more in just a second because there was a real distinction I made there from something else I did in the due diligence. Okay. Um, now don't just talk to the contractors that have worked on the property. Find some new ones to

6:54 talk to because sometimes the ones that that have been the tenur ones that have been there forever may mitigate the quality of their work. They may not be that great. So, you want to get fresh eyes on it to make sure nothing's been missed. Okay, that's another really important tip. Okay, so here are some things that you may encounter. Okay, mold being one of them. Now, here's the thing with mold. You don't have to be frightened of it, but the first thing you have to do is you have to figure out what's causing it. Okay, don't try to mitigate it or eliminate it until you figure out what's causing it. Okay? Otherwise, just going to come back. And so, you know, could be an AC line leaking. That was a big thing at that Shreport asset because they had what's called fur in um uh AC units where they where the um uh uh blower and

7:42 everything is inside the hallway ceiling. It's a horrible design, but they're in the ceiling and if they're just tilted slightly, they leak and it's it's really bad. Okay, so that's something that happens. Maybe you see negative drainage. This is the side of the wall of the building and the the ground is like this. You got to look for that, right? That's that's that's a very common thing that I always look for. Negative drainage. But uh if you can find out where the water's coming from, then you can then you can buy it. You know, I think Oliver just talked about a water intrusion issue. You got to figure it out. But uh you know, typically it's it's common sense and once you've done a few of these, you'll figure it out. You know, where it's coming from, but it's very very important. Leadbased paint, you're going to find that with pre-1978

8:28 bill uh properties. the the lease has to have a leadbased paint addendum in it. Any good property management company will already have it incorporated in there. Okay. Um and leadbased paint, you just got to you got to scrape it and vacuum it as you scrape it and uh and paint it. Asbess, I wouldn't buy it unless a professional removes it. Period. End of story. No point in dealing with it. Okay? But you know, lead based paint not a big deal. Mold not a big deal as long as you can find out what caused the mold. I can tell you that Shreveport property, it had serious mold. Like to the point where I had to send my own maintenance guy. I've got a maintenance guy here at my compound. He works here every every day. And I had to send him up there for a few months to help me with that property. And he had to wear hazmat suits, go in there. They had scrubbers. I mean, it was bad, bad,

9:15 bad. You won't likely ever encounter anything that bad. Okay. Now, this is what I was going to share with you. Talk to the tenants if at all possible. Now, when you go do your due diligence, you'll have the owner or the broker or the property manager walking with you. Try to get away from them and talk to the tenants. That Shreveport deal, okay? We had it under contract. I might have these numbers wrong, but but the the discount I don't have wrong. I believe it was under contract for 17.5 million. Okay. I talked to a tenant. She's like, and you want to ask them, do they like living there? What would they fix if they lived there? Are they going to stay? So on and so forth. You know, are they are they taking care of you? things like that. And and you can pretend you're looking to rent there. That's that's an easy way to get them to open up. Hey, I'm thinking about moving in here. Do you like it here? You know,

10:02 this tenant told me that, hey, are you aware that these buildings flood back here? And we didn't know that. And and I called my partner at the time and I'm like, dude, we're out. Okay. I don't want to buy this place. We're out. And then the seller came back and said, I'll take a million off. And I'm like, oh. And we did it. And I regret it, let me tell you. And so, and and this is the one I think I mentioned this yesterday. I can't remember because I talk about this a lot, but uh this is the one a partner brought it to us. They had their own management company, and this is an example of somebody that managed A&B assets taking a C-minus asset, which this was, and it was terrible. Horrible job. And uh when I uh uh and it took me eight months to get them out of there, and I had to step in and practically live there. And and I think I mentioned this, I'm pretty sure I did. And when I

10:48 took it over, it was grossing less than a hundred,000 a month. And I got it up to 300,000. Thank God. And and I found out Charlie actually was in Shreport. Charlie, who was on one of the panels, told me he drove by there and it was completely empty. They'd moved everybody out. They they failed completely. 403 units. Anyway, I digress. So, do they like living there? Is it quiet and safe? You know, is there crime? You know, uh are they going to stay or move? You learn so much from the tenants if you can if you can do that. Okay. Always, always, always use a building inspector or a contractor. I think I've hammered that enough. And if you see any issues at all, suspect any issues with the roof, with the HVAC, with the plumbing, with the electrical, with the foundations, make sure you get an expert

11:33 that's, you know, a plumber, an electrician, whatever. Uh, building a a GC or structural engineer to come check it out. Super important. Um, you're going to physically walk every single unit. You should have somebody with a camera videoing or taking pictures inside of every unit. You take a picture of the unit number and then everything behind that is that unit. Okay? And that may be the only time you're in that unit for years. Okay? And that you you shoot the the appliances, the counters, under the counters, the the HVAC closet, the ceilings, the walls, the windows, everything. You're shooting all that. Now, here's the thing. If you're buying a larger asset, okay, even over 50 units, property management companies have whole they put a whole team

12:19 together to come help you with this, okay? Like, uh, this one I'm going to show you, the sample deal package this evening. Um, it um, we had the property management company had like five teams there to walk. It was a 200 unit complex and we they walked all the units. They had iPads. They took pictures with the iPads and they rated everything on a scale of one to five as to, you know, the condition and uh and they also did a lease audit. Okay, we're going to talk about that in a second, but they walked every single unit. Now, there's going to be occasionally somebody's sick or, you know, a scary animal and they're not home, you can't get in, but you want to walk every possible unit. Super important, okay? You don't like spot check. You walk every freaking unit, okay? Okay.

13:05 Then you have a financial inspection process, right? Um you're going to you're going to um get the rent roll. You're going to get the P&L. Do they match? Okay. Do they is there is are they is there consistency there with how much they claim they had in income versus uh you know the rents on the rent roll? And if there's some inconsistencies there, asked to see bank statements, you will perform a lease audit or you will have your management company do it. They're very good at it. They do a nice job. You want to make sure that the rent roll matches up to the leases, right? You're going to log lease dates, amounts, things like that. Very important. Okay? But again, management companies will help you with that if

13:51 it's a if it's a more significant prop property, even probably a smaller one. I don't buy smaller ones, but I'm I'm sure that even if it's a 30 or 40 unit, you can get help with that. You're going to verify statements and contracts, okay? Uh, you know, you're going to want to see the utility bills. Do they match up to the P&L? Do they match up to the expense lines for those various utilities for water, electric, things like that? Sewer, trash. So, you're going to match that up. Don't get lazy about this. You got to do this homework. Doesn't take that long, but you got to check this stuff. And again, management company will help you with that as well. You got to review any contracts, okay? If there's contracts signed with vendors like landscapers, pool, snow removal, things like that. Now, if they have a laundry contract, those very often can survive closing like that shreport asset

14:37 had horrible laundry equipment. And thank God towards the end it had expired. I said, "Get it the hell out of here." and we got new equipment and it really it was really a huge positive change. Okay. All right. Now, I talked about this earlier. If things were left out that they didn't tell you when you do your due diligence or misrepresented, they BSD you, okay? Or you discover something that neither one knew about, you're going to retrade. Okay? Retrade means renegotiate. Okay? Do not be afraid to do that. Also, do not be afraid to walk away. Like I said, sometimes the best deals are the ones you don't do. If you have a bad experience on your first deal, like a major bad experience, it may be the only

15:24 deal you do, and that would be a crime because you you didn't, you know, do your homework here. This is doing your homework, right? So, one other quick thing. We encounter so many people that are frankly frustrated. You know, they're looking in the mirror and they're frustrated that they haven't been able to escape the rat race. they haven't been able to build cash flow to the point where they're able to have financial and time freedom with their families, you know, and maybe they see other people buying real estate and creating, you know, incredible cash flow and they think, well, it's just scary. You know, buying apartments is intimidating. And I get it. But see, that's why we created our Warrior mentorship program. They're our coaching students and they've had extraordinary results. My students, I've been teaching about 5 years and they own upwards of 140,000 units now that we know of, right? and we feel like it's just getting going now. We're looking to grow

16:10 this group and really take it to the next level and honestly believe that the greatest transfer of wealth could be upon us right now with this current economic environment. Everything's going on sale. So, we're looking for people who want to follow a proven framework really like a blueprint or a map literally step by step and then they're able to leverage our systems and our incredible network to raise money and equity to find deals and close those deals and build partnerships really nationwide. So, if you're interested in finding out more about how you can become more in our incredible network and take advantage of the unbelievable opportunities that are upon us, you can apply to my warrior mentorship program by texting the word crush to 72345 or you can go to mentorwithrod.com. And what we'll do is we'll set up a call so you can check us out and we can check

16:56 you out and see if it's a fit. Now again, you can go to mentorwithrod.com or text the word crush to 72345 to apply and we will speak soon.